Swiss drugmaker launches $5.7 billion hostile buyout bid

Swiss pharmaceutical giant Roche launched a $5.7 billion hostile takeover bid for San Diego’s Illumina late Tuesday, aiming in a single stroke to become a leader in the potentially massive gene mapping market.

Founded in 1998, Illumina has been racing with top rival Life Technologies of Carlsbad to create smaller, faster and less expensive machines for sequencing genes.

That could push the technology beyond research into mainstream applications, such as pinpointing which drugs are most likely to succeed based on a patient’s genetic makeup.

“Roche obviously wants to expand their sequencing portfolio, and choosing to buy the market leader seems like a reasonable move,” said Carsten Russ, a geneticist who evaluates new technology for the Broad Institute, which is affiliated with Harvard and MIT. “Sequencing is becoming more and more important for clinical diagnosis, and Illumina has the technology for this application.”

Wall Street analysts speculated that Roche’s $44.50 a share offer for Illumina may not be the top price for the San Diego company, particularly if a rival suitor emerges.

“We believe that although the current offer is way too low, a deal for Illumina is likely to get done eventually by Roche or by another bidder,” said Doug Schenkel, an analyst with investment firm Cowen & Co.

Roche, the drug conglomerate perhaps best known as the maker of Valium, has been courting Illumina since December, seeing an opening because of a steep decline in Illumina’s share price over the past 12 months. At the time, Illumina’s shares were trading around $27, about 55 percent below previous year levels.

But Roche’s overtures, including a $40-a-share offer on Jan. 3, were rebuffed by Illumina. That resulted in Roche going public with its hostile takeover bid.

Roche said it will ask Illumina shareholders to tender — or promise to sell — their shares to Roche. If enough shareholders agree, the takeover would take place.

In addition, Roche plans to nominate its own candidates to Illumina’s board and make other corporate governance proposals, setting the stage for long, arduous fight.

“Roche’s all-cash offer of $44.50 per share represents full and fair value for Illumina, and we expect Illumina’s shareholders will welcome the opportunity to sell at a significant premium to current market prices,” Roche Chief Executive Severin Schwan said in a statement.

On Wednesday, investors were betting a higher offer is in the cards. Illumina’s shares ended the day up 45 percent at $55.15 on the Nasdaq.

Illumina posted sales of $900 million in 2010 and employs 2,100 workers worldwide, including 1,000 in San Diego. In a letter to employees, Chief Executive Jay Flatley said the company’s board is evaluating Roche’s proposal.

“We realize that this news has the potential to be distracting,” he said. “Until the board makes its recommendation, however, we will be constrained in what we can say and simply cannot speculate on the outcome.”

Roche has its own sequencing equipment business. But it has only a small percentage of the market. Illumina and Life Technologies are the top companies, making machines that are much less expensive, smaller and perform faster than earlier generations. Their most advanced devices can map a single human genome in a day for less than $5,000.

The goal of the industry is a $1,000 genome, which could pave the way for these device to move beyond research labs and into more mainstream uses.

“While Illumina is predominantly a research company today, the potential for sequencing in clinical markets is large — billions of dollars or more — and the cost is sequencing is approaching a point where it is rapidly becoming economical for clinical trials and cancer management,” J.P. Morgan analyst Tycho Peterson said in a note to clients.

With its nearly $47 billion purchase of biotech pioneer Genentech in 2009, Roche became the world’s leading cancer drug company, said John McCamant, editor of the Bay Area-based Medical Technology Stock Letter. Among its top products is Herceptin, which is primarily used to treat breast cancer.

“Those are all targeted drugs, which means they have a molecular target,” he said. “So that’s the tie-in with Illumina. Take Herceptin. There is a test that’s marketed with Herceptin. That’s the poster child for diagnostics and therapeutics working together. So Roche can create more of those” with the Illumina deal.

If the deal is completed, Roche said it would combine its own gene mapping unit called Applied Sciences with Illumina and locate the headquarters in San Diego. The division is currently based in Penzberg, Germany. A company spokeswoman declined to provide further details. But Roche said it plans to maintain operations in Penzberg.

Quintin Lai, an analyst with Baird Equity Research, said he expects Illumina’s board to reject Roche’s offer. But he still puts the chances of a deal at 75 percent. He believes Roche covets Illumina’s potential in areas such as cancer diagnostics and therapy selection.

In addition, he noted that Roche has a history of boosting bids in hostile takeovers. It eventually raised its bid by 20 percent in its 2008 buyout battle for Ventana, a tissue diagnostics firm.

On the other hand, McCamant thinks it won’t be easy for Illumina to convince Roche to pay more.

“Roche is Swiss, and the Swiss are hard, tough and very good.” he said. “They’re also very large. Illumina could get more money, but they need to have somebody come in with the threat of a higher offer.”